Adagia, at the Corner of College and Bancroft, April 30 2007 12:00 Noon

Eight Berkeley economics professors wanted to have lunch with Alan Taylor of U.C. Davis today. I attribute this to a combination of effects: an end-of-semester effect in which people have given up on completing all the projects they hoped to complete before the end of the semester, and as a result are no longer keeping their heads down and are willing to go out to lunch; and a we-like-Alan-Taylor effect; unfortunately, identification is not achieved.

"So if Britain with its structural trade surpluses could run up net foreign assets equal to twenty months' GDP by 1913, could the U.S. run up a net foreign liability balance equal to twenty months' GDP by 2023?"

"By symmetry, that would mean that the rest of the world would have to play the role of pre-World War I Britain. Yes, it could happen."

"And somebody would have to play the role of pre-World War I Argentina. Would that be the U.S?"

"Usually in international finance the role of Argentina is played by Argentina."

"Doesn't Dani Rodrik say that Argentina is doing very well now? That this time its boom is not led by government or consumption spending, but by investment?"

"Dani is a contrarian."

"Twenty months' GDP in 2023 would be what, $45 trillion?" "$45 nominal trillion in 2023; about $30 trillion real at today's prices." "And the current net foreign asset and liability position of the U.S. is?" "We don't know. It's the difference between two large and poorly-measured numbers, gross foreign assets owned by Americans and gross American assets owned by foreigners. Subtract them and you get a number that is small in context--perhaps two months' worth of GDP, perhaps$2 trillion--and very, very poorly measured."

"And the capital income flows are still in balance?"

"Perhaps not. You've looked at the data much more closely than I have. And there are problems."

"Cash payouts by American-owned subsidiaries abroad are about the same proportion of book values as cash payouts by foreign-owned subsidiaries in the U.S., but earnings retained and reinvested by American-owned subsidiaries abroad are a much higher proportion of book values than earnings retained and reinvested by foreign-owned subsidiaries in the U.S."

"Which means?"

"Either that Daniel Gros is right, and that the standard statistics simply miss a great deal of factor payments from America to foreigners, or Dooley and company are right, and due to American managerial expertise Americans earn much higher rates of return on their investments abroad than foreigners do on their investments in the United States."

"'Dark matter'."

"Yes, dark matter--the source of the extraordinarily high profits of Eurodisney."

"There are too many physics metaphors in this subfield. We should have stuck to metaphors from theology."

"That was not a success."

"Not a success? I counted six mentions of 'original sin' in the Economist in one eighteen-month period."

"Not a success in that it was too often misinterpreted. People read Eichengreen and Haussmann to mean that countries that couldn't borrow in hard currencies--countries afflicted with 'original sin'--had sinned. They had done something bad--and deserved what happened to them."

"But wasn't that Augustine's point?"

"No. Augustine's point was that Adam had done something bad--eaten of the Tree of Knowledge of Good and Evil. As a result you were destined for Hell, even though the sin wasn't yours."